February 14, 2013

What You Don't Know, Could Hurt You

Are you one of the fortunate to have money in the bank? Do you think the FDIC insures all of it? Well, maybe, but, maybe not. The FDIC insures up to $250,000, but the amount insured is the combined amount in all accounts held under the same social security number. Spreading deposits between banks doesn't increase the coverage.

And just in case you wondered how much of America's deposits are insured, well, total bank deposits in the U.S. are somewhere around TEN TRILLION
DOLLARS and the FDIC deposit insurance fund as of March 31, 2012 had a
whopping $15 BILLION.

Okay, you say, there is no chance the banks are going to fail. You are probably right, but consider this.

Banks loan out far more money than they have on deposit from customers. How much more? That all depends on how much the Federal Reserve has dumped into their accounts. Banks now have tons of money on deposit, but much of it was put there by the Federal Reserve, in other words, printed money to prop up the banks where customer deposits were falling dangerously low and constricting the bank's ability to make loans, the source of their income.

So might your bank fail? Well, what if the Fed one day, with the push of a computer key, decided to "sweep" all of their accounts? Suddenly the banks would have no money to loan, no way to make an income and this could trigger a run on the banks by other depositors hurrying to get their money out before the bank closed its door.

Then might you make a claim for your FDIC insurance? Sure, but do you think they are going to pay some people in full and leave others holding the bag? Probably not. They will probably pay some folks in full (guess which ones) and then pro-rate for the rest.

Take a look at the numbers above and do the math for yourself. Can you say 10 cents on the dollar?

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